Question

Context

One source of growth is external growth from a merger or acquisition. Often mergers or acquisitions are justified on the basis of the expected benefits from "synergies" created by the merger or acquisition. Economists know these as economies of scale and economies of scope.

The focus of this discussion will be on defining economies of scale and economies of scope, as well as the key differences between the two within the context of a hypothetical scenario of your choice.

Instructions

Select one of the mergers and acquisitions below:

• Sirius XM acquires Pandora.
• The yet to be concluded merger of Sprint, T-Mobile, and Metro PCS.
• The merger of Strayer University and Capella University.
• The Renault–Nissan–Mitsubishi Alliance.

For your chosen scenario, address the following in your discussion post:

• How are the concepts of economies of scope and economies of scale different? How do they differ within the context of your chosen scenario? What are the synergies that come from the economies of scope? What are the synergies that come from the economies of scale?

Answer 1

In simple terms, economies of scale arise when there is an increase in production of goods and services, that is there is an increase in volume of production. Thus synergies which arise are lower unit costs accompanied with larger plants. Larger volume of products are produced.

Whereas economies of scope arise when the average cost of production decline. There are lower unit output costs along with more variants of product types. There are essentially synergies gained by producing different types of products and using the same resources where machineries are fungible.

The Renault - Nissan - Mitsubishi Alliance where the unit costs of production decline and there are more cars produced because of the alliance of all three companies where there are more production units available for production. Thus the large number of cars being produced will lead to economies of scale and more inputs will be sourced at lower costs of production due to bulk production.

Whereas economies of scope will arise when the same machinery present in Nissan will be used for the production of Renault cars, and there are more product types. The existing infrastructure creates value addition and several products are sold at lower costs because of the alliance with common distribution channels, export markets and single umbrella brand to sell several products of the three companies.